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Brexit: What Now?

The short-term shock and turmoil of Brexit will eventually pass.
Markets will stabilize as investors realize that the scare campaign
by the anti-Brexit establishment was vastly overblown. The Britain
of today is largely the same as the Britain of a week ago.

The big question, though, remains unanswered: Will Britain seize
on this opportunity to fundamentally remake its economic policies
in a way that will increase economic growth? Or will it simply
substitute British bureaucracy, taxes, and regulations for European
ones?

Despite the vote to leave the EU, Britain will eventually
negotiate a trade deal with the European bloc. After all, close to
half of Britain’s trade is with the EU, and the U.K. is one of the
top trading partners for many member states. Whatever the bluster
and hurt feelings, neither side is going to sacrifice those
markets. Britain could, for instance, follow the lead of countries
like Norway and Switzerland, and join the European Economic Area
(EEA) while remaining outside the EU. This would allow Britain to
continue to benefit from the free movement of people and goods
within Europe, without subjecting itself to stifling EU bureaucracy
and regulations in agriculture and other industries.

Will Britain’s lawmakers
use their new freedom to ditch the sclerotic welfare
state?

But Britain now has an opportunity to expand its trade
opportunities. As Daniel Hannan, a British member of the European
Parliament, has pointed out, the EU is not really a free-trade zone
but rather a “customs union,” which regulates tariffs for members
but erects trade barriers against countries outside the bloc.

For example, India has been trying to negotiate a free-trade
agreement with the EU since 2007, but the protectionist bureaucrats
in Brussels have thrown up one roadblock after another. Britain can
now steal a march on the rest of Europe by negotiating a separate
deal with India.

There is also talk about a trade deal or deals with Anglosphere
allies like the United States, Canada, Australia, and New Zealand.
The Obama administration has, unfortunately, declared that Britain
would have to go to the back of the “queue” — presumably
behind the proposed Trans-Atlantic Trade and Investment Partnership
- in any trade negotiations, but there is no reason for the next
administration to stick to that policy.

Beyond trade, Britain now has the chance to cast off the dead
weight of European tax and regulatory policy and build a pro-growth
economy. For instance, freed from the EU’s VAT directive, Britain
could significantly reduce its value-added tax. Indeed, no longer
bound by the EU’s belief in tax harmonization, Britain can become
the low-tax capital of Europe.

Likewise Britain can dump many of the regulations currently
imposed by Brussels. Those regulations include binding
renewable-energy targets, working-time directives, collective
redundancy directives, and regulations on alternative investments,
among others. EU-imposed regulations are estimated to cost Britain
at least 2 percent of GDP annually, and possibly as much as 6
percent.

Britain also has a new opportunity to look at spending and the
overall size of government. It is worth noting that government
spending as a percentage of GDP today is almost what it was when
the EU was established in 1993 (roughly 42 to 43 percent). That
leaves a lot of room for cutting.

In short, Britain has a unique opportunity to reform its
sclerotic welfare state.

But there is reason to worry. For example, ending British
contributions to the EU will save British taxpayers roughly £13
billion annually. But rather than use those savings to reduce
taxes, anti-EU politicians have promised to pour that money back
into the moribund National Health Service and other government
programs. Indeed, the pro-Brexit side has already made so many
promises that it could result in more spending. At the same time,
Brexit forces have offered nothing in the way of a tax- or
regulatory-reform agenda.

Britain has declared its independence from the EU bureaucracy,
with all its high taxes, heavy regulation, and protectionism. But
while replacing bad EU policies with bad British policies may be a
victory for sovereignty, it will do little to help the average
Briton unless the politicians have a change of heart.